Download Appendix 2 Social Enterprise Income Volatility

Finance and Risk Committee
Item 8 a)
12 October 2016
Reserves
1. Introduction
1.1. This discussion paper presents a framework for deciding on the Union’s
appropriate reserves level.
2. Background
2.1. The total funds held at the end of the financial year are known as reserves.
These funds are built up over time and are normally held in the form of assets
with the majority of the Union’s funds being held in the form of longer term
tangible fixed assets. A significant part of the reserves are held in cash
deposits.
2.2. Reserves are held for a variety of reasons, which for the Union includes the
need to provide a measure of safety against volatility in social enterprise trade,
fund replacement of fixed assets, and provide resources to allow for
development of the Union’s services to its members and mitigate against any
catastrophic events.
2.3. Total funds held are normally split into a number of categories and the Charity
Commission requires that Trustees disclose in the annual report specific
information about the reserves policy. Even though the Union has over £6m in
reserves, only the general reserves are freely available to spend on any of the
Union’s objects and therefore the focus of the disclosure. A draft statement
about the reserves policy is included in appendix 1.
2.4. It is important to remember that Charity law requires any income received by
a charity is to be spent within a reasonable period of receipt. Trustees are
required to be able to justify the holding of income as reserves.
3. How much reserves are currently held in the various fund types?
3.1. Total funds of £6,664,661 held as at 31 July 2016 are split into three
categories, being restricted funds of £3,890,671, designated funds of
£2,039,493 and the general reserve of £734,497 (the latter two comprise the
Union’s unrestricted funds).
3.2. Restricted Funds
3.2.1. The restricted funds are split between capital grants and student
activities/halls balances and are therefore not available for general use.
Capital grants represent historical grants to the Union specifically for the
refurbishment works in Metric, SK Bar, level 2M, installation of the second
lift and development of the Concert Hall. The capital grants balance of
£3,040,862 is being used to offset the depreciation charge for these
assets and will reduce over the remaining life of the assets which is
estimated to be over 13 years.
3.2.2. Student Activities & Hall Amenity funds are the residual of the relevant
unspent restricted funds income which has built up over time. During the
course of the year, this overall fund has declined as students spent more
self-generated income than was collected in year. The joint fund balance
of £846,809 can only be used for club and hall amenity activities.
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Finance and Risk Committee
Item 8 a)
12 October 2016
3.3. Unrestricted Funds
3.3.1. The surplus or remaining funds generated from the block grant, social
enterprise activity, mini bus hire, events and advertising less all the
associated expenditure constitute the unrestricted funds of the Union and
as such are freely available to spend on any of the charity’s purposes.
3.3.2. Designated Funds
3.3.2.1.
Designated funds are part of the unrestricted funds which
trustees have earmarked for a particular project or use, without
restricting or committing the funds legally. The designation may be
cancelled by the trustees if they later decide that the charity should
not proceed or continue with the use or project for which the funds
had been designated.
3.3.2.2.
Funds have been designated for the provision of tangible fixed
assets and are therefore not readily available for general use.
(Tangible fixed assets of £4,878,624 less the capital grant funding of
£3,040,862 = £1,837,762). £82,000 has also been designated for the
imminent purchase of 3 mini buses.
3.3.2.3.
The Union’s investment fund of £119,731 is also not readily
available in cash, therefore this reserve is treated as a designated
fund.
3.3.3. The level of free reserves readily available to spend as directed by the
trustees as at 31 July stands at £734,496.
4. How much in reserves does the Union need?
4.1. There is no single level or even a range of reserves that is right for all charities.
Any target set by trustees for the level of reserves to be held should reflect the
particular circumstances of the individual charity.
4.2. Base Line Needs
4.2.1. Even though the Union has a robust budget setting process, it remains
exposed to the uncertainty associated with whether or not its annual
targets will be achieved. In recent years this risk has been managed by
use of an operating contingency based on a modest percentage of social
enterprise income.
4.2.2.
The operating contingency has been useful towards:
4.2.2.1.
encouraging aspirational financial target setting, by making it
possible for potential shortfalls to be centrally mitigated.
4.2.2.2.
providing a safeguard that has helped demonstrate the
credibility of Union’s leadership at a time of increased focus on
financial mismanagement
4.2.2.3.
accelerating the rate of recovery of a depleted balance sheet
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Finance and Risk Committee
Item 8 a)
12 October 2016
4.2.3. There is an opportunity now to move away from operational
contingencies and insulate the Union by having adequate free reserves.
Social Enterprise gross profit is around £2.1m, and its various sources are
highlighted in appendix 2.
4.2.4. Each of the income streams has a different level of volatility and an
initial provision of 15% (£314k) would give consideration to the various
levels or risk and also go some way towards a contingency for a fall in
other income sources outside of the Social Enterprise.
4.2.5. College block grant has been excluded from this assessment as in
recent years the Union has been in a position to secure increases in
funding by being increasingly seen as a vital partner in delivering an
essential part of the students’ experience.
4.3. Capital Funding – Replacement Strategy
4.3.1. Having a robust capital investment plan is essential for the
sustainability of the Union. The 10 year capital plan presented to Finance
and Risk in June 2016 provided a detailed trajectory for first year capital
expenditure of £323k. The remaining 9 year profile is built on a simple
replacement strategy of existing assets. While this plan helped to inform
what level of expenditure is needed in the short-term, a much more
detailed capital replacement model now needs to be developed.
4.3.2. The first 5 years of the plan had an estimated value of £930k while the
full 10 year profile had an estimated cost of £1.8m. A prudent provision
would be to have reserves to cover a five year period so as to encourage
longer term thinking.
4.4. New Initiatives
4.4.1. A sample list of new initiative is shown in appendix 3. This is not
considered to be an exhaustive list but merely presents a number of ideas
that have not yet been fully explored and consequently have not been
added to the 10 year capital plan.
4.4.2. A detailed investment appraisal will need to be undertaken for many of
the initiatives so that their viability can be more clearly understand. Such
a study is necessary in order to be able to clearly articulate the benefit to
our members.
4.4.3. Historically major capital investments have been underpinned by capital
grants. It is therefore expected that partnership funding would be sought
and obtained as part of a decision making process. However, the Union
is not seeking to rely exclusively on external funding to fulfil its strategic
aims.
4.4.4. The new initiative reserve should also provide initial funding for new
service enhancements.
5. Possible questions for discussion
5.1. To what extend is the Union prepared to fund increased reserves in order to
shift the risk of income volatility to the balance sheet? On the other hand, how
comfortable is the Union with the potential exposure to reputational damage if
we miss our operational targets?
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Finance and Risk Committee
Item 8 a)
12 October 2016
5.2. By what processes and criteria should the Union prioritise any new initiatives?
6. Recommendation
6.1. The operating contingency is removed and financial risk is now managed by
the free reserves held in the balance sheet.
6.2. The Union adapts a reserve range from £1.2m to £1.8m being:
6.2.1. A base line reserve of £1.244m (£314,000 for social enterprise volatility
and £930,000 for a five year provision of capital spending)
6.2.2.
Plus a half of the above (£622,000) for new initiatives
Malcolm Martin
Head of Finance and Resources
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Finance and Risk Committee
Item 8 a)
12 October 2016
Appendix 1
Wording to be published in the Annual Report of the Trustees.
The Trustees of the Union have reviewed the organisation’s needs to generate free
reserves in accordance with Charity Commission’s guidance.
In the trustees’ view the Union needs free reserves in order to:

Ensure that the Union has sufficient cash during periods of volatile trade,
enabling the Union to meet its short term financial liabilities as they fall due. A
provision of 15% (£314,000) will ensure the Union has sufficient funds to
accommodate trading uncertainties.

Provide the financial resources to enable investment in premises, facilities and
equipment to enhance and maintain the range of services provided to
members. A long term capital plan has been established and a short term five
year provision of £930,000 is needed to replace and enhance existing capital
resources.

Provide sufficient funds to allow the Union pursue new opportunities for service
development.
The trustees consider the ideal range of free reserves as at 31 July 2016 to be between
£1.2m and £1.8m, where the lower limit is intended to accommodate the baseline
needs of the Union and the upper limit is intended to enable potential new service
initiatives.
The Union has £734,496 of free reserves as at 31 July 2016 and plans to reach the
upper limit within the next seven to ten years depending on the level of capital
resources needed over the intervening period and the extent to which new service
initiatives are adopted. The trustees have reviewed a longer term financial model and
consider that given the Union’s operational investment budget in 16/17, providing the
Union achieves a breakeven position for 17/18, then makes modest surpluses for the
next five years and spends capital resources in line with the current capital investment
plan, the target range of reserves can be achieved within the stated period.
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Finance and Risk Committee
Item 8 a)
12 October 2016
The Union holds restricted reserves of £3,040,862 for capital grants and £849,809 for
student activities and halls funding. Both of these reserves are fully allocated and are
not available for general use by the trustees.
Designated funds of £2,039,493 are part of the unrestricted funds which trustees have
earmarked for particular projects or specific use. These funds have been allocated to
fixed assets and are not available for general use. The value of £82,000 has been
included with designated funds which represents the commitment to purchase 3 new
mini buses. The Union’s investments have also been included within designated funds
as they are not readily available to the trustees.
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Finance and Risk Committee
Item 8 a)
12 October 2016
Appendix 2
Social Enterprise Income Volatility
Gross Surplus Risk Profile
Social Enterprise Income
(Gross Profit)
Budget
16/17
Gross
Profit
£'000's
Beit Venue
Retail
CX
H Bar
SK Bar
Catering
Ents
237
501
98
141
862
220
36
Budget
16/17
Net
Profit
Proportion
11%
24%
5%
7%
41%
11%
2%
2095
10% 210
15% 314
Note:
excluding Union income from the
following sources:
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144
134
(23)
14
215
1
(16)
469
5% 105
Summer Ball & Foundry
Memberships
Marketing Fairs (net)
Marketing Advertising
Bank deposit interest
Mini Buses
Total
£'000's
£'000's
25
50
66
59
16
140
356
Proportion
31%
29%
-5%
3%
46%
0%
-3%
Finance and Risk Committee
Item 8 a)
Appendix 3
New Capital Initiatives, not yet encapsulated
in the 10 year capital plan
1. Current service challenges:
1a Replacement flooring - activity spaces
1b Replacement flooring - dining area
1c Major systems developments
2. Social Enterprise Opportunities:
2a Catering service development
2b Retail - development
2c Concert Hall - development
2d Metric development
3. Other:
3a Refresh the media centre
3b Club developments
3c Initial funding for new service initiatives
3d Exceptional unforeseen developments
3e Catastrophic event
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12 October 2016